Posted by: John Elliott | September 11, 2012

India “is looking sticky” as the system crumbles

It is tempting to think that India is heading towards some form of implosion. The parliament didn’t operate for 75% of the monsoon session, doing little business, because of Bharatiya Janata Party opposition tactics.

Two major industries – coal and telecoms – have been swamped with corruption scandals that are blocking development and are primarily focussed on the prime minister Manmohan Singh’s office. Other industries such as aviation and airports, gas field contracting, and highway construction have simmering crony capitalist scandals that have yet to erupt fully. The power sector is in crisis, partly for lack of coal that is unlikely to improve, and its projects are riddled with corruption.

Most leading private sector companies working in such areas are involved on one or more of these scandals, and now there is a fresh possible fraud case emerging that some observers say could prove as big as Satyam, India’s fourth largest software and outsourcing company, which collapsed at the beginning on 2009. Satyam and its allied infrastructure company, Maytas (Satyam spelt in reverse), turned out to be just the tip of a vast iceberg of corporate cronyism based in Hyderabad, capital of Andhra Pradesh. Now Hyderabad’s Deccan Chronicle (DCHL) newspaper-based group  is in serious financial troublewith unexplained massive borrowings and possible charges of fraud.

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Foreign observers are shocked and worried by the degree of corruption and how far and deep the tentacles reach, and about the impact this is having on India’s institutions and its overall performance. An old banker friend, in a superb British under-statement, emailed me yesterday that “India is looking sticky”. I replied: “Sticky indeed, but nothing much that we didn’t know about, just woodwork crumbling a bit and everything crawling out!”

Satyam had a dubious financial reputation for several years before the 2009 collapse, but it did not suit anyone to take much notice in bull market years. The Deccan Chronicle prompters and associates were arousing concerns eight years ago. The 2G telecom scandal that erupted in 2010 had been written about (see my blog) for more than two years. Land allocations and operating review terms in the 2006 franchise won for Delhi’s new airport by Hyderabad-founded GMR, and concern about the handling of Air India’s endless crises, were widely known at the time but largely ignored.

India’s current coal scandal – dubbed “Coalgate” – centres on the government approving licences on a negotiated allotment basis, without competitive tendering. This is not new. There has been a debate for some 20 years over the relative merits of “first come first serve” (introduced in 1957), and similar application-based awards, compared with competitive tendering.

Both systems have advantages and disadvantages in terms of project speed and pricing, and both can be manipulated, though the no-tender system provides more discretionary powers to politicians and bureaucrats, and enables unqualified speculators to win work and make quick profits. That happened on both the 2G “first come first serve” telecom franchises (manipulated to enable the minister’s friends to be “first”), and the coal allocations.

Big government losses

India’s Comptroller and Auditor General (CAG) has highlighted both the telecom and coal procedures, controversially alleging that the absence of tendering led to astronomically high losses for the government.  (It did similarly on the GMR airport deal, though with less political impact).

The CAG’s most recent estimate is that the government has potentially lost as much as $39bn (CAG’s Rs1.76 lakh crores at pre-2012 exchange rates) on coal in recent years. The Rs1.76 lakh crores may well be far too high, but even if the real figure is only a fraction of that, it would be significant.

Coal blocks have been issued to influential people, including politicians, many of whom (as happened on 2G telecom) sold them at huge profits without developing any coal extraction. Other bigger and established companies sat on their blocks, which they were supposed to be developing to provide coal for power and other infrastructure projects, waiting for coal prices to increase so they could sell the coal at a profit. Some of the allocations were done under a mine developer and operator (MDO) scheme that is ripe for misuse.

India’s Central Bureau of Investigation last week filed preliminary criminal cases (FIRs) against five companies and various individuals for criminal conspiracy and cheating – but that is only tinkering around the edges of what is involved.

Manmohan Singh (above) is under attack, with the BJP blocking parliament to demand his resignation (which won’t happen), because the coal ministry came directly under him from 2006 to 2009. The BJP also wants all the blocks cancelled, which would be devastating for the economy, so some way of penalising companies that start projects late while cancelling only the worst offenders is probably needed.

While he was in charge of coal, the prime minister did not take firm enough action to move to competitive tendering, despite proposals from various parts of the government that this should happen. I suspect that he saw merits in the allotment system as a way to speed up urgently needed but slow-moving infrastructure projects – a preoccupation of the prime minister’s office throughout the decade.

Should resign

But, as happened with telecoms, he failed to tackle the underlying corruption and crony business political links. There is no suggestion that he gained any personal financial benefit, though critics say he should have resigned rather than preside over such a system.

What all these events and scandals indicate is that India is now paying the price for two decades of economic growth that has been based heavily on illegal collusion between big business, politicians and bureaucrats – especially where scarce natural resources such as land, minerals, telecom space have been involved, plus other areas with government licences such as airports and ports privatisation and development.

There has of course been corruption-free growth, notably in software and information technology (apart from Satyam) and areas such as the auto industry where there is little government or public sector involvement. But even there, as the problems with the Deccan Chronicle group appear to suggest, corruption breeds on the greed and ambitions that have only had free rein for just over 20 years.

There is no end to this in sight – no end to the corruption itself, even though some of those involved may be more cautious, nor to the exposure of scandals through India’s right to information legislation backed by strong media and political interest. This is not implosion, but the system is beginning to crumble – and that needs strong government leadership that is sadly lacking.

See also http://ridingtheelephant.wordpress.com/2012/03/27/indias-coal-industry-under-attack-at-home-and-abroad/



Responses

  1. Yes Sir. Now the Congress men will be more careful. They will do it discreetly but at bigger scale. Congress men have perfected the art of CORRUPTION.God save Indians

  2. Isn’t this what always happens when systems are liberalised when the possibility of easy gain is suddenly opened? USSR/Russia (no need to go into specifics), China (virtually all millionaires are sons or daughters of CPC leaders), or robber baron US or for that matter US today? Even a “perfect” liberalisation – not yet seen on this earth – still leaves plenty of scarce resources for the state to allocate. The solution is the same as in the US around 1900 – progressivism, good governance, league of women voters etc. – or in the UK 50 years earlier – Gladstonian rectitude against “old Corruption” – voters that punish the corrupt. The solution is not a “pure” liberalism. The state is always there and literally no country has ever developed without an active – and yes often party corrupt – state.

    I lived in India in the early 1980’s when this all started and it was corrupt then too – licence raj. Indira Gandhi was in many ways the worst leader India has had. The sums were smaller, but the result was worse, certainly less growth and more hopelessness. Then you really had the impression that India was winding down, wearing out: the government had no money and you saw no change from one year to the next, while the population grew. Coming back regularly since, one certainly gets the impression of a much improved infrastructure – still far from adequate, but compare the road Delhi Agra then and now…


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